Working Paper: CEPR ID: DP11062
Authors: Giuseppe Darimattiacci; Oscar Gelderblom; Joost Jonker; Enrico Perotti
Abstract: We describe how the business corporation gradually emerged in the 17th century in response to the need to lock in long-term capital to profit from trade opportunities with Asia. Since contractual commitments to lock in capital were not fully enforceable in partnerships, this evolution required a legal innovation, essentially granting the corporation a property right over capital. Locked-in capital exposed investors to a significant loss of control, and could only emerge where and when political institutions limited the risk of expropriation. The Dutch East India Company (VOC, chartered in 1602) benefited from the restrained executive power of the Dutch Republic and was the first business corporation with permanent capital. The English East India Company (EIC, chartered in 1600) kept the traditional cycle of liquidation and refinancing until, in 1657, the English Civil War put the crown under strong parliamentary control. We show how the time advantage in the organizational form had a profound effect on the ability of the two companies to make long-term investments and consequently on their relative performance, ensuring a Dutch head start in Asian trade that persisted for two centuries. We also show how other features of the corporate form emerged progressively once the capital became permanent.
Keywords: capital lock-in; corporate form; institutional development; legal innovation; limited liability
JEL Codes: G30; K22; N24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political institutions (D02) | Emergence of the corporate form (G30) |
| Political stability (P16) | Ability to commit capital long-term (G31) |
| Dutch East India Company (VOC) (F54) | Long-term investments (G31) |
| Political institutions (D02) | VOC's ability to secure permanent capital (G32) |
| VOC's ability to lock in capital (G32) | Investment strategies (G11) |
| Differences in capital structure (G32) | Performance in trade (VOC vs EIC) (N73) |
| EIC's initial organizational structure (L22) | Hindered long-term investments (G31) |